What Is Mortgage Delinquency?

What is mortgage delinquency, and what is its possible impact on your home loan and your credit score? All are important questions to ask, considering the negative effect of delinquency on your finances and credit score.

Sometimes, unexpected hardships can strain our budgets, increasing the chances of a late mortgage payment.

We’ll dive deeper into mortgage delinquency, including its consequences and how to work with your lender or servicer to get out of it.

Mortgage Delinquency, Defined

Mortgage delinquency is a real estate term that refers to when homeowners are at least 30 days overdue on making at least one mortgage payment. Consequences for mortgage delinquency range from late fees to credit impacts and possibly even foreclosure on a home.

Current Mortgage Delinquency Rates

According to data from the Federal Reserve Board, mortgage delinquency rates are projected to drop in 2024.

Single-family residential mortgage delinquencies dropped in the fourth quarter of 2023, falling 1.69% from 1.74% in the first quarter. The highest mortgage delinquency rate since the start of 2020 was 2.83%, recorded in the third quarter of 2020.

What Happens When You’re Delinquent?

Financial hardships can sometimes lead to late mortgage payments. Lenders, such as banks, credit unions and online institutions, will work with borrowers to find a practical solution. The solution may be a payment plan or loan modification that helps borrowers free up cash and catch up on past-due payments.

In the worst-case scenario, mortgage delinquency can lead to foreclosure. That’s why it’s critical to talk with your lender or servicer and work with them to find a way to get back on track with your mortgage payments. (Your servicer collects your monthly mortgage payment and may not be the same as your original lender.)

Mortgage Delinquency Example

Let’s see the effect of mortgage delinquency on a fictional homeowner we’ll call Taylor. Suppose Taylor gets laid off from their job and struggles to make their monthly mortgage payments. Their next step might be to call their lender and request relief due to their sudden loss of income.

If they don’t reach out to their mortgage lender and develop a plan to get their outstanding balances paid, they run the risk of late fees and penalties piling up. If they keep falling behind on their payments, it may get to the point where the lender repossesses Taylor’s house and sells it to recover its own losses.

What Are The Solutions For Mortgage Delinquency?

The consequences of mortgage default include late fees, credit score damage and foreclosure. To help avoid these outcomes, consider the following solutions for mortgage debt relief.

Modify The Loan

A servicer may offer to modify a borrower’s mortgage terms to get them back on track with their monthly payments. They may adjust the mortgage’s remaining principal balance, interest rate or loan term.

A servicer may also offer a borrower with an adjustable-rate mortgage (ARM) a fixed-rate mortgage so they have a stable monthly payment.

Ask For Forbearance

Forbearance is a temporary agreement to pause or lower a homeowner’s mortgage payments. Typically, forbearance is better suited for financial emergencies resulting from short-term hardships, such as divorce, sickness or loss of income.

Compared to foreclosure, forbearance is a preferable alternative that lets you keep your home. But while it offers a temporary financial lifeline, it doesn’t erase your debt. Borrowers must repay missed or reduced payments according to the timeline set by their lender.

List The Home As A Short Sale

A short sale happens when a homeowner is approved to sell their home for less than the amount they owe on the mortgage. The sale proceeds go to the lender. The lender will either forgive the difference between the sale price and the outstanding mortgage balance or obtain a deficiency judgment, a legal ruling that requires a borrower to pay the outstanding balance after a sale. Some states may require borrowers to pay the outstanding mortgage balance by default.

While you’ll lose your home with a short sale, the damage to your finances, credit history and score shouldn’t be as severe as foreclosure.

Sign A Deed In Lieu Of Foreclosure

Foreclosure is a legal process that gives lenders the right to recoup their growing losses by selling a home they’ve repossessed. As you might imagine, this is the most severe consequence of ongoing mortgage delinquency. It’s an outcome that lenders prefer to avoid considering the time and expense.

That said, homeowners can opt to use a deed in lieu of foreclosure as a last resort This is an arrangement where a borrower signs over the deed to the property to their lender in exchange for preventing or stopping the foreclosure process.

If you use a deed in lieu of foreclosure, you give up ownership of the home and will likely still experience some negative effects to your credit score, but the impact won’t be as harsh as going through the complete foreclosure process. If you’re unable to modify your loan, qualify for forbearance or short sell your home, this option might be the best way to preserve your financial situation after defaulting on your mortgage.

How Can I Avoid Mortgage Delinquency?

Making on-time monthly payments is the most straightforward way to avoid mortgage default. But when the unexpected happens, it can strain even the most carefully planned budgets.

Use the following hints, tips and strategies to help avoid delinquency.

Make Sure You Can Afford Your Mortgage

The first step to avoiding mortgage delinquency is to only apply for a mortgage you can afford. To make this happen, shop around for favorable rates and terms. If you’re worried about being able to afford a mortgage at current interest rates, figure out how much you can realistically spend on a house with our mortgage calculator. Plug in your numbers to get an estimated monthly mortgage payment.

Budget For Housing Expenses

Mortgage delinquency can also happen when a homeowner fails to adequately budget for homeownership expenses besides the mortgage payment, such as homeowners insurance or property taxes. Prospective home buyers would benefit from calculating their housing expense ratio before applying for a mortgage.

Consult With Your Lender

If you’re struggling to keep up with your mortgage payments and you’re worried you may fall into mortgage delinquency, contact your lender ASAP. Taking this step early on in the process can help establish trust and build goodwill. Most of all, it can help you avoid the consequences of defaulting on a home loan.

The Bottom Line: On-Time Payments Are Key To Avoiding Mortgage Delinquency

Mortgage delinquency occurs when you’re late on one or more monthly mortgage payments. While the initial penalties can include late fees and credit damage, the repercussions can escalate to losing your home.

It’s critical to maintain an open dialogue with your lender or servicer. Remember, they want to avoid foreclosure as much as you do and will likely work with you to develop a plan that allows you to get back on track with your mortgage and stay in your home.

If you’re seeking mortgage assistance, read our guide to mortgage relief options for more strategies.